The Washington Supreme Court published its opinion in the case of Royal Oaks Country Club v. Washington on January 11, 2024. The court found that bona fide initiation fees paid to not-for-profit organizations are fully deductible from Washington business and occupation (B&O) tax.
The interpretation upends the Department of Revenue’s policy of treating initiation fees as taxable or partially taxable when the fees are tiered based on membership type or access privileges—such as golf privileges at an exclusive club as opposed to a pool access-only membership.
What Changed
The Washington B&O tax is applied broadly to most types of gross income with very few deductions. One such deduction is the deduction for dues and initiation fees in Revised Code of Washington (RCW) Section 82.04.4282.
RCW Section 82.04.4282 provides that in computing the tax, taxpayers may deduct initiation fees and dues.
If members receive a significant amount of goods or services as part of their membership dues, and there's no extra charge for these, or if the dues vary based on the amount of goods or services received, the value of those goods or services cannot be deducted under this section.
Under this statute, initiation fees and dues had historically been treated essentially the same by the Department of Revenue such that graduated tiers of membership or services may cause all or part of the charges to be taxable.
In the recent case, Royal Oaks sought to fully deduct their one-time initiation fees from their income subject to B&O tax. New members were admitted to the club based on a one-time initiation fee, which varies based on membership level, and pay monthly dues. Prior to using any of Royal Oaks’ dining services, golfing, swimming, or fitness facilities, members must pay both their initiation fee and first month’s dues. The Department of Revenue attempted to assert that the initiation fees were charges for access to facilities and were partially taxable.
The court found that the last sentence in the statute was explicitly clear that only dues should be taxed—wholly or partially—based on the level of services included in membership and that the initiation fees paid to Royal Oaks were solely for becoming a member of the club, not for any access or services.
Specifically, the court focused on the fact that paying the initiation fee for any membership tier doesn’t alone grant the member access to anything; only if the member pays their dues on top of the initiation fee does the member get access to facilities and services.
Who This Impacts
Many not-for-profit clubs and organizations may have paid B&O tax on all or a portion of initiation fees based on Department of Revenue guidance. Based on the Washington Supreme Court’s overturning of the Department of Revenue’s policy on this issue, it’s possible some of these types of organizations have B&O tax overpayments that might be recoupable through refund claims or amended returns.
Looking Forward
The Washington Supreme Court’s ruling is final, and taxpayers can now rely on the new interpretation of this statute as laid out in the opinion for both retroactive and prospective periods. Meanwhile, the Department of Revenue will likely begin updating its published administrative guidance to adjust for this change.
We’re Here to Help
To learn more about how the Washington Supreme Court’s decision could impact you or your business, contact your Moss Adams professional.
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